Investment Banking Issues - Essay Example

Fourthly, there are synergies. These are the resulting combined effect which is often greater than the sum of the organization’s individual effects. It is the increased effectiveness resulting when the two organizations work together. Sizeable synergies usually help in offsetting the financial convention thereby resulting in accretive acquisitions. The fifth key driver is the form of financing that is adopted and most notably, it entails the debt and equity mix (Rosenbaum & Pearl, 2013: 389). It represents the proportion of debt and equity. And finally, there is the cost of debt which is normally the cost of borrowing funds from the organization.

The LBO analysis often has several primary functions. First it for the most part gives a floor or benchmark valuation for the organization and helps figure out what a financial sponsor can afford to pay for the target and still stand a chance of realizing a satisfactory or adequate profit for its venture or investment. The second primary function of LBO (leveraged buyouts) analysis is to give companies an opportunity of making large acquisitions of other ventures without necessarily having to commit a substantial amount of capital. This helps companies to easily acquire the target (Rosenbaum & Pearl, 2013).

The other primary function of LBO analysis is the determination of the financing structure for the target. LBO analysis helps an organization is determining the amount of capital, the type of capital as well as the terms of debt or equity for the target. This, therefore, facilitates the process of acquisition of the target. On the other hand, LBO analysis assists in mergers and acquisition (M&A) advisory. This primary function aids in determining an implied range of valuation for any given target in the acquisition process. The LBO analysis is used to determine valuation with the help of key value drivers such as purchase price, financial projections, financing structure as well as exit multiple and year with the assumption that exit is via a sale. In that regard, sensitivity analysis is carried out on the above key value drivers to produce a range of Internal rates of Returns that are used in framing the valuation for the target (Rosenbaum & Pearl, 2013). 

Financial sponsors typically target IRRs of at least 20% in assessing acquisition opportunities as well as determining valuation accordingly. In addition, LBO analysis is used in analyzing and crafting financing structures because it is the basis of cash flow generation and debt repayment. It employs credit statistics as well as investment returns over the projection period (Rosenbaum & Pearl, 2013).